Polypipe — Acquisitions feed into FY21 earnings recovery

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Polypipe — Acquisitions feed into FY21 earnings recovery

After a positive end to FY20, Polypipe has made an active start to FY21. The £210m acquisition of ADEY (part-funded by a c £96m gross new equity raise) is a significant step and fits well with the company’s product portfolio, market positions and its sustainable water/climate management business strategy. Including acquisition effects, we expect FY21 PBT to exceed FY19 levels, as they supplement an underlying EBIT recovery following a COVID-19-affected trough year. EPS approaches FY19 levels in FY22 (as the number of shares in issue is c 20% higher) on our estimates.

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Industrials

Polypipe

Acquisitions feed into FY21 earnings recovery

ADEY acquisition

Building & construction

26 February 2021

Price

560.0p

Market cap

£1,276m

€1.13/£

Net debt (£m) at end June 2020
(exc IFRS 16 lease liabilities)

71

Shares in issue

247m

Free float

94%

Code

PLP

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

9.8

16.3

-3.5

Rel (local)

8.7

10.8

-0.2

52-week high/low

602.0p

395.5p

Business description

Polypipe is a leading supplier of largely plastic building products and systems. Operations in the UK (c 90% of revenue) address a broad range of sectors including residential, commercial and civil building demand and a number of subsectors within them. Overseas revenues are generated through exports, particularly to the Middle East, and a small Italy-based specialist fittings business.

Next events

FY20 results

16 March 2021

Analyst

Toby Thorrington

+44 (0)20 3077 5721

Polypipe is a research client of Edison Investment Research Limited

After a positive end to FY20, Polypipe has made an active start to FY21. The £210m acquisition of ADEY (part-funded by a c £96m gross new equity raise) is a significant step and fits well with the company’s product portfolio, market positions and its sustainable water/climate management business strategy. Including acquisition effects, we expect FY21 PBT to exceed FY19 levels, as they supplement an underlying EBIT recovery following a COVID-19-affected trough year. EPS approaches FY19 levels in FY22 (as the number of shares in issue is c 20% higher) on our estimates.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/18**

433.2

67.1

28.1

11.6

19.9

2.1

12/19

447.6

70.8

29.2

4.0

19.2

0.7

12/20e

400.5

35.5

13.2

4.0

42.5

0.7

12/21e

495.1

76.1

25.3

8.5

22.2

1.5

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items. **Continuing operations only. FY19 dividend represents the H1 payment only; no final dividend was declared.

Expanding climate management offering

ADEY is the UK’s leading provider of protection solutions for water-based heating systems, mainly for residential use. The company relocated to new facilities in the last year – the end of a three-year period in which it generated a 7% revenue CAGR – and generated revenue and EBITDA of c £51m and £18m (c 35% margin) in FY20. Increased penetration of the replacement cycle for existing central heating systems and, in time, new renewable energy-based ones, are expected to be the primary future growth drivers. Polypipe brings sector, channel and distribution expertise to help facilitate this drive. Moreover, there is a clear strategic fit with Nu-Heat (the supplier of sustainable underfloor and renewable energy heating systems, acquired for £27m earlier in February).

Earnings to rebound from trough FY20 year

Polypipe expects ADEY to be double-digit earnings accretive in the first full year post acquisition, with ROIC expected to match the company’s WACC in the second. A placing at 515p raised £96.3m gross for the company, funding just under half of the consideration with the remainder to come from existing borrowing facilities. In early January, Polypipe firmed up its FY20 guidance for EBIT ‘in excess of’ (previously ‘around’) £40m. Consequently, FY20 EPS will be just below half of the FY19 level. On our updated estimates, underlying recovery and acquisition effects return FY22 EPS almost back to FY19 levels.

Valuation: Share price returning to start year levels

The market has absorbed Polypipe’s share issue well and its share price is returning towards levels seen at the beginning of the year. On our revised estimates, an FY22e P/E of c 20x (and EV/EBITDA of 12.3x) looks full for the time being but it is still relatively early to call for a stronger post COVID-19 recovery in our view, until the economic ramifications of the current vaccination activity become more apparent.

Exhibit 1: Financial summary

£m

2014

2015

2016

2016*

2017*

2018

2019

2020e

2021e

2022e

December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

 

327.0

352.9

436.9

387.2

411.7

433.2

447.6

400.5

495.1

526.9

Cost of Sales

 

 

(202.4)

(210.0)

(256.8)

(219.1)

(236.0)

(251.9)

(255.2)

(248.3)

(287.2)

(305.6)

Gross Profit

 

 

124.6

142.9

180.1

168.1

175.7

181.4

192.4

152.2

208.0

221.3

EBITDA

 

 

60.8

69.3

86.4

84.5

88.3

90.6

99.1

62.8

107.9

116.0

Operating Profit (underlying)

 

 

46.3

54.2

70.4

69.5

73.4

75.0

79.3

43.2

84.4

92.1

SBP

 

 

0.0

0.0

(1.0)

(1.0)

(0.8)

(1.0)

(1.2)

(1.2)

(1.2)

(1.2)

Operating Profit (reported)

 

 

46.3

54.2

69.4

68.5

72.6

74.0

78.1

42.0

83.2

90.9

Net Interest

 

 

(7.7)

(5.3)

(6.6)

(6.6)

(5.8)

(5.8)

(6.2)

(5.5)

(6.5)

(6.5)

Other finance

 

 

(1.0)

(0.9)

(1.0)

(1.0)

(1.1)

(1.1)

(1.1)

(1.0)

(0.6)

(0.6)

Intangible Amortisation

 

 

0.0

(3.0)

(6.8)

(6.8)

(5.5)

(5.9)

(7.5)

(7.5)

(7.5)

(7.5)

Exceptionals

 

 

(20.7)

(3.5)

(0.6)

(0.6)

(4.6)

(2.7)

(3.2)

(2.8)

0.0

0.0

Profit Before Tax (norm)

 

 

37.6

48.0

61.8

60.9

65.7

67.1

70.8

35.5

76.1

83.8

Profit Before Tax (statutory)

 

 

16.9

41.5

54.4

53.5

55.6

58.5

60.1

25.2

68.6

76.3

Tax

 

 

(5.4)

(9.2)

(11.8)

(10.1)

(11.8)

(10.5)

(11.9)

(6.4)

(13.7)

(15.1)

Profit After Tax (norm)

 

 

32.2

38.8

50.0

49.2

53.9

56.5

58.9

29.1

62.4

68.7

Profit After Tax (statutory)

 

 

11.5

32.3

42.6

43.4

43.8

49.1

49.6

20.1

56.2

62.6

 

 

 

 

 

 

 

 

 

 

 

 

 

Average Number of Shares Outstanding (m)

 

199.9

199.3

198.9

198.9

198.4

199.0

199.3

218.2

244.5

244.5

EPS - normalised (p)

 

 

16.1

19.4

25.0

24.6

26.9

28.1

29.2

13.2

25.3

27.8

EPS - statutory (p)

 

 

5.8

16.2

21.4

22.2

22.1

24.7

24.9

9.2

23.0

25.6

Dividend per share (p)

 

 

4.5

7.8

10.1

10.1

11.1

11.6

4.0

4.0

8.5

9.8

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross Margin (%)

 

 

38.1

40.5

41.2

43.4

42.7

41.9

43.0

38.0

42.0

42.0

EBITDA Margin (%)

 

 

18.6

19.6

19.8

21.8

21.4

20.9

22.1

15.7

21.8

22.0

Operating Margin (u/lying) (%)

 

 

14.2

15.4

16.1

17.9

17.8

17.3

17.7

10.8

17.0

17.5

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE SHEET

 

 

 

 

 

 

 

 

 

 

 

 

Fixed Assets

 

 

324.2

476.5

472.6

 

455.1

520.3

542.4

540.1

779.7

783.0

Intangible Assets

 

 

235.0

378.4

371.6

 

356.5

401.9

401.8

395.3

624.8

617.3

Tangible Assets

 

 

89.2

98.1

101.0

 

98.6

118.4

140.6

144.8

154.9

165.7

Investments

 

 

0.0

0.0

0.0

 

0.0

0.0

0.0

0.0

0.0

0.0

Current Assets

 

 

103.9

99.6

119.5

 

147.7

141.7

148.2

188.2

135.9

177.5

Stocks

 

 

39.9

47.5

52.2

 

53.5

58.1

59.7

62.6

74.4

79.2

Debtors

 

 

20.2

29.3

38.9

 

32.6

37.2

40.5

38.0

47.2

50.0

Cash

 

 

43.1

21.6

26.5

 

35.7

46.2

47.7

83.0

8.0

40.4

Current Liabilities

 

 

(69.8)

(87.2)

(104.5)

 

(108.8)

(108.7)

(108.1)

(107.8)

(118.7)

(123.3)

Creditors

 

 

(69.8)

(87.2)

(104.5)

 

(108.8)

(108.7)

(108.1)

(107.8)

(118.7)

(123.3)

Short term borrowings

 

 

0.0

0.0

0.0

 

0.0

0.0

0.0

0.0

0.0

0.0

Long Term Liabilities

 

 

(120.6)

(227.9)

(200.2)

 

(192.0)

(222.1)

(221.1)

(121.4)

(166.7)

(168.1)

Long term borrowings

 

 

(118.0)

(215.9)

(190.8)

 

(184.1)

(210.4)

(197.7)

(98.4)

(148.4)

(148.4)

Other long term liabilities

 

 

(2.6)

(12.0)

(9.4)

 

(7.9)

(11.7)

(23.4)

(23.0)

(18.3)

(19.7)

Net Assets

 

 

237.7

261.0

287.4

 

302.0

331.2

361.4

499.1

630.2

669.1

 

 

 

 

 

 

 

 

 

 

 

 

 

CASH FLOW

 

 

 

 

 

 

 

 

 

 

 

 

Operating Cash Flow

 

 

50.6

72.6

86.5

 

79.2

90.0

89.4

59.1

90.1

111.3

Net Interest

 

 

(10.4)

(5.7)

(7.3)

 

(6.6)

(6.1)

(7.4)

(5.5)

(6.9)

(6.9)

Tax

 

 

(3.7)

(5.2)

(10.1)

 

(12.6)

(11.2)

(12.4)

(8.5)

(12.4)

(13.7)

Capex

 

 

(14.9)

(18.9)

(18.7)

 

(22.0)

(23.2)

(18.0)

(20.8)

(30.0)

(31.0)

Acquisitions/disposals

 

 

(0.3)

(149.5)

0.0

 

0.0

(42.5)

(12.2)

(2.8)

(237.0)

0.0

Financing

 

 

(1.7)

0.0

(2.9)

 

(0.7)

0.3

2.4

116.5

91.5

(1.5)

Dividends

 

 

(3.0)

(10.6)

(17.1)

 

(21.0)

(22.3)

(23.7)

0.0

(16.7)

(22.2)

Net Cash Flow

 

 

16.6

(117.3)

30.5

 

16.3

(15.1)

18.1

138.0

(121.4)

36.0

Opening net debt/(cash)

 

 

84.7

74.9

194.3

 

164.3

148.4

164.2

150.0

15.4

140.4

Finance leases initiated

 

 

(9.6)

(1.7)

0.0

 

0.0

(1.6)

(3.5)

(3.6)

(3.6)

(3.6)

Other

 

 

2.8

(0.4)

(0.5)

 

(0.4)

0.8

(0.4)

0.2

(0.0)

0.0

Closing net debt/(cash)

 

 

74.9

194.3

164.3

 

148.4

164.2

150.0

15.4

140.4

108.0

Lease finance (under IFRS 16)

 

 

 

 

 

 

 

 

14.8

13.5

13.5

13.5

Source: Company accounts, Edison Investment Research

Source:

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This report has been commissioned by Polypipe and prepared and issued by Edison, in consideration of a fee payable by Polypipe. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the Edison analyst at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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United Kingdom

Neither this document and associated email (together, the "Communication") constitutes or form part of any offer for sale or subscription of, or solicitation of any offer to buy or subscribe for, any securities, nor shall it or any part of it form the basis of, or be relied on in connection with, any contract or commitment whatsoever. Any decision to purchase shares in the Company in the proposed placing should be made solely on the basis of the information to be contained in the admission document to be published in connection therewith.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document (nor will such persons be able to purchase shares in the placing).

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

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Level 4, Office 1205

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McBride — Resetting the business

McBride has delivered a good performance over H121, with higher revenues and improved gross margins. Input costs have started to increase, but the board’s expectations for the full year are unchanged. The company gave an update on its new strategy, Programme Compass, and as previously announced, the business has been reorganised into product divisions to sharpen focus, improve execution and increase speed to market. McBride has been through several strategy resets over the years and time will tell if this successfully addresses the company’s long-term challenges. The CEO has thorough knowledge of the business and there are not expected to be substantial exceptional or capital costs associated with the programme.

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